After oil prices jumped sharply last week as Israel-Iran tensions escalated. It’s especially alarming near the chokepoint strategic Strait of Hormuz. This strategic choke point linking the Gulf with the Arabian Sea lies at the southern tip of the Persian Gulf. To the north is Iran, to the south are Oman and the United Arab Emirates (UAE). It serves an important public role — transporting oil. One-fifth of the world’s oil supply traverses its waters.
The recent developments in military conflict have sparked worries over possible future constraints on oil supply. Analysts have cautioned that Iran could strike U.S. infrastructure or shipping in the Strait of Hormuz. If they succeed, it will stop the flow of millions of barrels of oil each day. The strait currently hosts several dozen tankers transporting energy from major oil and gas producers in the Middle East to global markets.
The market’s knee-jerk reaction according to Saul Kavonic, head of energy research at MST Financial.
“What we see now is very initial risk-on reaction. But over the next day or two, the market will need to factor in where this could escalate to,” – Saul Kavonic, MST Financial.
As U.S. military operations in the region continue, experts are watching for a possible escalation with concern. As Vagda, of Vandana Insights, pointed out, all of this was a very fragile state of affairs.
“It’s an explosive situation, albeit one that could be defused quickly as we saw in April and October last year, when Israel and Iran struck each other directly,” – Vandana Hari, Vandana Insights.
The Strait of Hormuz has been known for decades as one of the most important shipping lanes in the world. Its importance is further underscored by the fact that nearly 1 million barrels of oil move through the pipeline every day. Any military action that disrupts this trade route could create shockwaves across global markets, including spikes in energy prices across the globe.
Military actions have continued, causing people to worry that there would be further escalation. Many are concerned that the war could widen beyond its current borders.
“It could also spiral out into a bigger war that disrupts Mideast oil supply,” – Vandana Hari, Vandana Insights.